IN its quest to facilitate more retail participation in the local corporate bond and sukuk (Islamic bond) market, the Securities Commission Malaysia (SC) is expected to liberalise market rules by the first quarter of next year.

The initial step taken is the launching of a centralised bond and sukuk information platform which consolidates all bond trading-related information under one roof.

The Bond and Sukuk Information Exchange (BIX) aims to create a convenient one-stop centre for investors to garner information which had previously been fragmented across multiple sources.

SC chairman Tan Sri Ranjit Ajit Singh has described the BIX platform as “a public utility and cornerstone component of our overall bond and sukuk infrastructure”.

Initial feedback to the platform and liberalisation plans have been positive. Retirement Fund Inc (KWAP) CEO Datuk Wan Kamaruzaman Ahmad welcomed the decision while acknowledging the fact that this could lead to more competition for bond products as well as the emergence of new players.

KWAP and other institutional investors are by far the largest investors in the local bond and sukuk market. The pension fund currently manages a RM135 bil fund, out of which RM47 bil are invested in government and corporate bonds.

Liquidity consideration has often led to the retirement fund investing mostly in Malaysian Government Securities and Government Investment Issues, according to Kamaruzaman.

More broadly, however, he believes the liberalisation of the market and the introduction of BIX will pave way for an increased participation in the corporate bond and sukuk scene.

“Previously, bond and sukuk-related information were all over the place,” Kamaruzaman told the SCxSC Digital Finance Conference recently. “The BIX platform puts all that information in one website and gives us the ease of doing business.”

Improving liquidity

As BIX makes investing in this asset class simpler for retail investors, their market participation is poised to rise. This will help improve liquidity and make it more attractive for KWAP, too, added Kamaruzaman.

“It allows market participants to have access to the latest bond data at their fingertips and invest with more confidence, he tells FocusM. “An increase in retail participation will spur liquidity of the domestic bond market, hence narrowing the bid-ask spread in the domestic bond market’s pricing.”

Moreover, Tan opines that the BIX platform also allows investors to have a better gauge of traded prices and market sentiments.

The SC’s efforts to liberalise the bond and sukuk market will be done in two parts. First, it will be reviewing the primary market issuance processes and disclosure requirements in addition to expanding the range of corporate bonds and sukuk offered to retail investors.

This may include removing the current eligibility requirements limiting access to high net-worth individuals with personal assets of more than RM3 mil.

The SC will likely limit retail investments to issuances which carry a high investment grade while non-rated and junk bonds are likely to remain out of reach for retail investors.

The market regulator will address the secondary market to enable the introduction of a “seasoning” framework. This will help facilitate retail access to existing corporate bonds and sukuk that are currently traded in the wholesale market.

According to BIX chairman Datuk Lee Kok Kwan, liberalising the rules makes sense as the local bond and sukuk market is well-developed. He highlighted that Malaysia has a very successful RM1.3 tril bond and sukuk market with new issuances of about RM80 bil annually.

Given the high savings rate among Malaysians, Lee, who is also a director of CIMB Group, pointed out that it was imperative that the asset classes available were widened beyond property and equity.

This is especially so as the fixed income market is the largest asset class in the world at US$110 tril compared to US$80 tril for the equity market.

iFAST Capital’s Tan views the SC’s plans to liberalise the market as positive but believes this should be done progressively rather than all at once.

“We do not encourage the total removal of high net-worth eligibility, at least not at this period of time where retail investors are still rather new with bond investments,” he argues. “We suggest that progressive liberalisation of the investors profile may be more appropriate.”

However, he concurs with the regulator’s plans to limit retail participation to specific bond grades. Retail investors should be limited to “investment grade bonds (rated AA and above by local rating agencies) which have lower default risks,” he adds.